Publication 225: Farmer's Tax Guide; Publication 225 Introductory Material

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

The valuable advice and assistance given us each year by the National Farm Income Tax Extension Committee is gratefully acknowledged.

Introduction

At the time this publication went to print, Congress was considering legislation, H. R. 6 (Energy Policy Act of 2003), that could affect farmers. See Publication 553, Highlights of 2003 Tax Changes, for information on whether the legislation was enacted and, if so, the specific items of interest to farmers. Publication 553 will be available on the IRS website at www.irs.gov.

You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. A farm includes stock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards.

This publication explains how the federal tax laws apply to farming. Use this publication as a guide to figure your taxes and complete your farm tax return. If you need more information on a subject, get the specific IRS tax publication covering that subject. We refer to many of these free publications throughout this publication. See chapter 21 for information on ordering these publications.

The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. However, the information given does not cover every situation and is not intended to replace the law or change its meaning. This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service.

The IRS Mission.

Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

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Internal Revenue Service
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We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Comments on IRS enforcement actions.

The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. If you wish to comment on the enforcement actions of the IRS, you can:

Call 1–888–734–3247,
Fax your comments to 202–481–5719,
Write to
Office of the National Ombudsman
U.S. Small Business Administration
409 3rd Street, S.W.
Washington, DC 20416
Send an email to [email protected], or
Download the appraisal form at www.sba.gov/ombudsman.

Treasury Inspector General for Tax Administration.

If you want to report, confidentially, misconduct, waste, fraud, or abuse by an IRS employee, you can call 1–800–366–4484 (1–800–877–8339 for TTY/TDD users). You can remain anonymous.

Farm tax classes.

Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Please contact your county extension office for more information.

Important Changes
for 2003

The following items highlight a number of administrative and tax law changes for 2003. They are discussed in more detail throughout the publication. More information on these and other changes can be found in Publication 553, Highlights of 2003 Tax Changes.

Increased section 179 deduction dollar limit. The maximum section 179 expense you can elect to deduct for property you placed in service during 2003 has increased from $24,000 to $100,000. See chapter 8.

Increased threshold for figuring any reduction in the dollar limit. The $200,000 threshold amount used to figure any reduction in the maximum section 179 deduction has increased to $400,000 for property placed in service in 2003. See chapter 8.

Revocability of section 179 deduction. You can revoke an election (or any specification made in the election) to take a section 179 deduction for any property without IRS approval. The revocation can be made on an amended return and applies to elections and specifications made on your 2003 tax return.

Addition of 50% special depreciation allowance. For qualified property you place in service after May 5, 2003, you can take a special depreciation allowance that is equal to 50% of the property's depreciable basis. However, you can elect to claim the 30% special allowance for property that qualifies for the 50% allowance, or elect to claim no special allowance. See chapter 8.

Eligibility of carried-over basis for special depreciation allowance. If you acquire qualified property in a like-kind exchange or involuntary conversion, the carried-over basis of the acquired property is eligible for a special depreciation allowance. See chapter 8.

Exclusion of qualified nonpersonal use trucks and vans from definition of passenger automobile. A truck or van that is a qualified nonpersonal use vehicle placed in service after July 6, 2003, is not considered to be a passenger automobile (and is therefore not subject to the passenger automobile limits). See Publication 946, How To Depreciate Property, for the definition of qualified nonpersonal use vehicles.

Depreciation limits for business cars. The total section 179 deduction and depreciation (including the special depreciation allowance) you can take for a passenger automobile you use in your business and first place in service in 2003 is generally $10,710, for a car placed in service after May 5, 2003, and $7,660 for a car placed in service before May 6, 2003. Special rules apply to electric vehicles and certain trucks and vans. See chapter 8.

Depreciation limits for trucks and vans. Maximum depreciation deductions have been established for passenger automobiles (such as minivans and sport utility vehicles) that are built on a truck chassis and are placed in service in 2003. These limits are generally higher than those for other automobiles. See chapter 8.

Earned income credit. The maximum amount of income you can earn and still get the earned income credit has increased. To claim the credit, you must have earned income (including net earnings from self-employment) and adjusted gross income of less than $33,692 ($34,692 for married filing jointly) and meet certain other requirements. For more information, including what counts as earned income, see Publication 596, Earned Income Credit (EIC).

Child tax credit. You may be able to claim a tax credit for each of your qualifying children under age 17 at the end of the year. The credit can be as much as $1,000 (up from $600) for each qualifying child.

Self-employed health insurance deduction. You can deduct 100% (up from 70%) of your self-employed health insurance premiums as an adjustment to income. See chapter 5.

Standard mileage rate. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck is 36 cents a mile for all business miles driven. See chapter 5.

Tax rates and maximum net earnings for self-employment tax. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $87,000. There is no maximum limit on earnings subject to the Medicare part (2.9%). For information on the self-employment tax, see chapter 15.

Backup withholding. For amounts paid in 2003, the backup withholding rate is 28%. See chapter 2.

Additions to small watershed programs. The following programs have been added to the list of small watershed programs from which cost share payments you receive may be excludable.

Reduced capital gains tax rates. The maximum tax rate on net capital gains has been reduced for individual taxpayers for sales, exchanges, or conversions of assets after May 5, 2003. The lower rates (from 20% to 15% and from 10% to 5%) apply to assets held for more than one year. See chapter 10.

Elimination of qualified 5-year gain. The 8% maximum tax rate for qualified 5-year gain has been eliminated for sales and other dispositions after May 5, 2003. See chapter 10.

Increased limits on elective deferrals and catch-up contributions. The limit on elective deferrals increases to $12,000 for 2003. This new limit will apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), and deferred compensation plans of state or local governments and tax-exempt organizations. A plan can permit participants who are age 50 or older at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for 2003 increases to $2,000. See chapter 17.

Increased limits on SIMPLE plan salary reduction and catch-up contributions. The limit on salary reduction contributions to a SIMPLE plan increases to $8,000 in 2003. A SIMPLE plan can also permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions. The catch-up contribution limit for 2003 increases to $1,000. See chapter 17.

Social security and Medicare wage threshold for household employees. The social security and Medicare wage threshold increased to $1,400 for 2003. This means that if you paid a household employee cash wages of less than $1,400 in 2003, you did not have to report and pay social security and Medicare taxes on that employee's 2003 wages. Note: The threshold remains at $1,400 for 2004. For more information, see Publication 926, Household Employer's Tax Guide.

Important Changes
for 2004

The following items highlight a number of administrative and tax law changes for 2004. More information on these and other changes can be found in Publication 553, Highlights of 2003 Tax Changes.

Section 179 deduction. The $100,000 dollar limit on the section 179 deduction and the $400,000 threshold amount used to figure any reduction in the dollar limit will be subject to adjustments for inflation. For information on the section 179 deduction, see chapter 8.

Maximum net earnings for self-employment tax. The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2004 will be published in Publications 533 and 553. There is no maximum limit on earnings subject to the Medicare part.

Wage limits for social security and Medicare taxes. The maximum wages subject to the social security tax for 2004 will be published in Publication 51, Circular A, Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare tax.

Important Reminders

Principal agricultural activity codes. You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. The U.S. Census Bureau also uses this information for its economic census. See the list of Principal Agricultural Activity Codes on page 2 of Schedule F.

Postponed tax deadlines in disaster areas. The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. See chapter 13.

Marginal production of oil and gas. The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas that was scheduled to expire for tax years beginning after 2001 has been extended to tax years beginning before 2004. For more information on marginal production, see section 613A(c)(6) of the Internal Revenue Code.

Business use of your home. You may be able to deduct expenses for your home office even if it is not where you perform your most important business activities or spend most of your business time. See chapter 5.

Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality, (3) transactions for which you have or a related party has contractual protection against disallowance of the tax benefits, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, (5) transactions resulting in book-tax differences of more than $10 million, and (6) transactions with asset holding periods of 45 days in one year or less and that result in a tax credit of more than $250,000. For more information, see the Instructions for Form 8886.

Estimated tax. When you figure your estimated tax, you must include any alternative minimum tax you expect to owe. See chapter 14 and Publication 505.

Averaging of farm income. You, as an individual farmer, can choose to average all or part of your taxable farm income when you figure your income tax. If you average your income, you may be able to use a negative taxable income amount for a base year when figuring your tax on Schedule J (Form 1040). See chapter 4.

Peanut quota buyout program payments. If you are an eligible peanut quota holder, you are entitled to receive peanut quota buyout program payments. For information about the tax treatment of these payments, see chapter 4.

Voluntary withholding. You can request income tax withholding from the following payments on Form W–4V, Voluntary Withholding Request.

Direct deposit of refund. If you are due a refund on your tax return, you can have it deposited directly into your account at a bank or other financial institution. See your income tax package for details.

Change of address. If you change your home or business address, you should use Form 8822, Change of Address, to notify the IRS. Be sure to include your suite, room, or other unit number.

Third party designee. You can check the Yes box in the Third Party Designee area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

Electronic deposits of taxes. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur in 2004 and thereafter if you deposited more than $200,000 in federal depository taxes in 2002 or you had to use EFTPS in 2003. See chapter 16.

Overdue tax bill. If you receive a bill for overdue taxes, do not ignore it. If you owe the tax shown on the bill, you should make arrangements to pay it. If you believe it is incorrect, contact the IRS immediately to suspend action until the mistake is corrected. See Publication 594, The IRS Collection Process, for more information.

Publication on employer identification numbers (EIN). Publication 1635, Understanding Your EIN, provides general information on employer identification numbers. Topics include how to apply for an EIN and how to complete Form SS–4.

Form W–4 for 2004. You should make new Forms W–4 available to your employees and encourage them to check their income tax withholding for 2004. Those employees who owed a large amount of tax or received a large refund for 2003 may need to file a new Form W–4. See Publication 919, How Do I Adjust My Tax Withholding.

Earned income credit. You, as an employer, must notify employees who worked for you and from whom you did not withhold income tax about the earned income credit. See chapter 16.

Electronic Form 1099. Form 1099 can be issued electronically if the recipient consents to receive it that way.

Form 1099–MISC. File Form 1099–MISC if you pay at least $600 in rents, services, and other miscellaneous payments in your farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee and is not incorporated. See chapter 2.

Children employed by parents. Wages you pay to your children age 18 and older for services in your trade or business are subject to social security and Medicare taxes. See chapter 16.

Farmers and crew leaders must withhold income tax. Farmers and crew leaders must withhold federal income tax from farm workers who are subject to social security and Medicare taxes. See chapter 16.

Social security tests for seasonal farm workers. If you pay seasonal farm workers less than $150 in annual cash wages, the wages are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farm workers. The seasonal farm worker must meet certain tests. See chapter 16.

Medical savings accounts (MSAs). The pilot program for MSAs is scheduled to end December 31, 2003. If it does, you can participate in an Archer MSA after 2003 only if you were an active MSA participant before January 1, 2004, or you become an active MSA participant after 2003 because you are covered by a high deductible plan of an MSA participating employer. See Publication 969, Medical Savings Accounts (MSAs).

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1–800–THE–LOST (1–800–843– 5678) if you recognize a child.

Important Dates

You should take the action indicated on or before the dates listed. Saturdays, Sundays, and legal holidays have been taken into account, but statewide holidays have not. A statewide legal holiday delays a due date only if the IRS office where you are required to file is located in that state.

Due dates for deposits of withheld income taxes, social security taxes, and Medicare taxes are not listed here. For these dates, see Publication 509, Tax Calendars for 2004.

Fiscal year taxpayers. Generally, the due dates listed apply whether you use a calendar or a fiscal year. However, if you have a fiscal year, refer to Publication 509 for certain exceptions that may apply to you.

2004 Calendar Year

Farm employers. Give your employees their copies of Form W–2 for 2003 by February 2, 2004.

Farmers. Pay your estimated tax for 2003 using Form 1040–ES. You have until April 15 to file your 2003 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2003 return and pay any tax due by March 1, 2004, to avoid an estimated tax penalty.

Farm employers. Give your employees their copies of Form W–2 for 2003. If an employee agreed to receive Form W–2 electronically, have it posted on a website and notify the employee of the posting.

Social security, Medicare, and withheld income tax. File Form 943 to report social security and Medicare taxes and withheld income tax for 2003. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return. (Do not report wages for nonagricultural services on Form 943.) For more information, see chapter 16.

All farm businesses. Give annual information statements to recipients of certain payments you made during 2003. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. For more information, see Information Returns in chapter 2.

Federal unemployment (FUTA) tax. File Form 940 (or 940–EZ) for 2003. If your undeposited tax is $100 or less, you can either pay it with your return or deposit it. If it is more than $100, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return. For more information on FUTA tax, see chapter 16.

Social security, Medicare, and withheld income tax. File Form 943 to report social security, Medicare, and withheld income tax for 2003. This due date applies only if you deposited the tax for the year in full and on time.

Federal unemployment (FUTA) tax. File Form 940 (or 940–EZ) for 2003. This due date applies only if you deposited the tax for the year in full and on time.

All farm businesses. File information returns (Form 1099) for certain payments you made during 2003. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for different types of payments. If you file Forms 1099 electronically (not by magnetic media), your due date for filing them with the IRS is extended to March 31. The due date for giving the recipient these forms remains February 2.

Farm employers. File Form W–3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W–2 you issued for 2003. If you file Forms W–2 electronically (not by magnetic media), your due date for filing them with the Social Security Administration (SSA) is extended to March 31. The due date for giving the recipient these forms remains February 2. For more information, see Form W–2 under Information Returns in chapter 2.

Farmers. File your 2003 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2003 estimated tax by January 15, 2004.

Corporations. File a 2003 calendar year income tax return (Form 1120 or 1120–A) and pay any tax due. For more information, see Paying and Filing Income Taxes in Publication 542, Corporations.

Electronic filing of Forms 1099 and W–2. File Forms 1099 with the IRS and Forms W–2 with the SSA. This due date applies only if you file electronically (not by magnetic media). Otherwise, the due date is March 1. The due date for giving the recipient these forms remains February 2. For information about filing Forms 1099 electronically, see Publication 1220, Specifications for Filing Forms 1098, 1099, 5498, and W–2G Electronically or Magnetically. For information about filing Forms W–2 electronically with the Social Security Administration, call 1–800–772–6270 or visit www.ssa.gov/employer.

Farmers. File an income tax return (Form 1040) for 2003 and pay any tax due if you did not file by March 1.

Partnerships. File a 2003 calendar year return (Form 1065). For more information, see Partnership Return (Form 1065) in Publication 541, Partnerships.

Federal unemployment (FUTA) tax. If you are liable for FUTA tax, deposit the tax owed through March if more than $100.

Federal unemployment (FUTA) tax. If you are liable for FUTA tax, deposit the tax owed through June if more than $100.

Federal unemployment (FUTA) tax. If you are liable for FUTA tax, deposit the tax owed through September if more than $100.

Publication 225Introductory Material

Introduction

Important Changes for 2003

Important Changes for 2004

Important Reminders

Important Dates

2004 Calendar Year

Publication 225
Introductory Material

Important Changes
for 2003

Important Changes
for 2004